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Eurozone

 
Investment Dictionary: Eurozone
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A geographic and economic region that consists of all the European Union countries that have fully incorporated the euro as their national currency.

Also referred to as "euroland".

Investopedia Says:
The eurozone is one of the largest economic regions in the world and its currency, the euro, is considered one of the most liquid when compared to others. This region's currency continues to develop over time and is taking a more prominent position in the reserves of many central banks.

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Wikipedia: Eurozone
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Eurozone (euro area)
The eurozone as of 2009
     Eurozone as of 2009
Currency euro
Type Economic & Monetary
Established 1999
Members 16 (see below)
Governance
Political control Eurogroup
Issuing authority European Central Bank
Affiliated with European Union
Statistics
Population 328,597,348
GDP (PPP) €8.4 trillion[1]
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The eurozone (officially the euro area)[2][3] is an economic and monetary union (EMU) of 16 European Union member states which have adopted the euro currency as their sole legal tender. It currently consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Eight[4] other states are obliged to join the zone once they fulfil the strict entry criteria.

Monetary policy of the zone is the responsibility of the European Central Bank, though there is no common representation, governance or fiscal policy for the currency union.

The term "eurozone" or "euro area" can also be taken informally to include third countries that have adopted the euro, for example Montenegro (see details on these countries below). Three European microstates – Monaco, San Marino and the Vatican City – have concluded agreements with the European Union permitting them to use the euro as their official currency and mint coins,[5] but they are neither formally part of the eurozone[6][7] nor represented on the board of the European Central Bank.

Contents

Members

In 1998 eleven EU member-states had met the convergence criteria, and the eurozone came into existence with the official launch of the euro on 1 January 1999. Greece qualified in 2000 and was admitted on 1 January 2001. Physical coins and banknotes were introduced on 1 January 2002. Slovenia qualified in 2006 and was admitted on 1 January 2007. Cyprus and Malta qualified in 2007 and were admitted on 1 January 2008. Slovakia qualified in 2008 and joined on 1 January 2009. As of 2009 there are 16 member states with 329 million people in the eurozone.

     EU Eurozone (16)      EU states obliged to join the Eurozone (9)      EU state with an opt-out on Eurozone participation (1 - UK)      EU state planning to hold a referendum on the euro (1 - Denmark)      States outside the EU with issuing rights (3)      Other non-EU users (4)  v • d • e 
State Adopted Population Exceptions
Austria Austria 01999-01-01 1 January 1999 &0000000008356707.0000008,356,707
Belgium Belgium 01999-01-01 1 January 1999 &0000000010741048.00000010,741,048
Cyprus Cyprus 02008-01-01 1 January 2008 &0000000000801622.000000801,622  Northern Cyprus[8]
Finland Finland 01999-01-01 1 January 1999 &0000000005325115.0000005,325,115
France France 01999-01-01 1 January 1999 &0000000064105125.00000064,105,125  New Caledonia[9]
 French Polynesia[9]
 Wallis and Futuna[9]
Germany Germany 01999-01-01 1 January 1999 &0000000082062249.00000082,062,249
Greece Greece 02001-01-01 1 January 2001 &0000000011262539.00000011,262,539
Republic of Ireland Ireland 01999-01-01 1 January 1999 &0000000004517758.0000004,517,758
Italy Italy 01999-01-01 1 January 1999 &0000000060090430.00000060,090,430 Flag of Campione d'Italia.svg Campione d'Italia[10]
Luxembourg Luxembourg 01999-01-01 1 January 1999 &0000000000491702.000000491,702
Malta Malta 02008-01-01 1 January 2008 &0000000000412614.000000412,614
Netherlands Netherlands 01999-01-01 1 January 1999 &0000000016481139.00000016,481,139  Aruba[11]
 Netherlands Antilles[12]
Portugal Portugal 01999-01-01 1 January 1999 &0000000010631800.00000010,631,800
Slovakia Slovakia 02009-01-01 1 January 2009 &0000000005411062.0000005,411,062
Slovenia Slovenia 02007-01-01 1 January 2007 &0000000002053393.0000002,053,393
Spain Spain 01999-01-01 1 January 1999 &0000000045853045.00000045,853,045
European Union Eurozone &0000000328597348.000000328,597,348

Enlargement

Main article: Enlargement of the eurozone
Ambox outdated serious.svg
 Parts of this section (those related to Poland joining ERM II) may no longer be up to date. Please update this section to reflect recent events or newly available information, and remove this template when finished. Please see the talk page for more information. (October 2009)
     eurozone countries      ERM II members      EU member with currency pegged to the euro (Bulgaria)      EU members with free-floating currencies      non-EU members not pegged to the euro      non-EU members using the euro      non-EU member with currency pegged to the euro (Bosnia and Herzegovina)

Eleven countries, Denmark, Sweden, the United Kingdom, Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania are in the European Union but do not use the euro. Before a state can join the eurozone, it must spend two years in the European Exchange Rate Mechanism (ERM II). As of the 1 January 2008, five National Central Banks (NCBs) participated in the mechanism (see table below). The remaining currencies are expected to follow as soon as they meet the criteria.

Romania is seeking adoption in 2014.[13] When Hungary adopted a program of financial convergence in 2006 to tackle its serious fiscal problems, there was no new target set for adopting the euro.[14] Estonia had problems with inflation that prevented it adopting the euro in 2007; the estimated date is now 2011. Some recent analysis says that Bulgaria will not be able to join earlier than 2015, due to their inflation problems and the impact of the global financial crisis of 2008.[15] The Bulgarian lev is pegged to the euro at a fixed rate of 1.95583 leva = 1 euro, having previously been pegged to the German mark.

On 10 September 2008, speaking at the launch of an economic forum in a Polish resort of Krynica-Zdrój, Polish Prime Minister Donald Tusk announced the ruling government's objective to join the eurozone in 2012, by holding a referendum in 2010 and being approved by the European Central Bank in 2011.[16][17][18] However, since the Polish constitution will need to change first[19] and they will have to join the ERM II before second quarter 2009,[20] this target date is still very aggressive.

On January 1, 2009, current Czech PM, Mirek Topolánek, declared that on November 1, 2009, the Czech government will announce a fixed date for euro adoption, since the Czech Republic "currently fulfills all criteria for adoption of the euro."[21]

The 2008 financial crisis has increased interest in Denmark and Poland to join the eurozone, and in Iceland to join the European Union, a pre-condition for adopting the euro.[22] On the other hand, since Latvia is asking for help from the International Monetary Fund (IMF), it is possible that the IMF will force Latvia to give up its currency peg as a precondition; officially taking Latvia out of the ERM II and possibly moving the euro adoption date even further from 2013 than currently planned.[23]

European Free Trade Association Council of Europe Switzerland Albania Croatia Liechtenstein Iceland Norway Armenia Schengen Area European Economic Area Azerbaijan Bosnia and Herzegovina Austria Germany Malta Georgia (country) Belgium Slovenia Greece Netherlands Cyprus Eurozone Moldova European Union Finland Italy Portugal Spain Sweden Republic of Ireland Montenegro France Slovakia Luxembourg Lithuania Republic of Macedonia Poland Hungary Bulgaria Denmark Russian Federation Czech Republic Romania Latvia Estonia Serbia United Kingdom Ukraine European Union Customs Union Monaco Turkey San Marino Andorra Vatican City International status and usage of the euro#States with issuing rights
A clickable Euler diagram showing the relationships between various multinational European organisations.

Denmark and the United Kingdom obtained special opt-outs in the original Maastricht Treaty of the European Union. Both countries are legally exempt from joining the eurozone unless their governments decide otherwise, either by parliamentary vote or referendum. The current Danish government has announced plans to hold a referendum on the issue following the adoption of the Treaty of Lisbon.[24][25][26] Sweden gained a de facto opt-out by exploiting a legal loophole. It does not work to meet the criteria to join, deliberately staying out of ERM II, and so is not able to adopt the currency as it is obliged to. This is because the Swedish public rejected the euro in a referendum. The Commission tolerates this, but has stated that it would not be lenient on any future members attempting this action.[citation needed]

Non-member usage

Further information: International status and usage of the euro

The euro is used beyond the EU states which have joined the economic and monetary union. Three states, Monaco, San Marino and Vatican City,[27][28] have signed formal agreements with the EU to use the euro, and to mint their own coins. However, although they have formally adopted the euro and mint coins, they are not considered part of the eurozone by the ECB and do not have a seat in the ECB or Euro Group.

Several other countries have officially adopted the euro as their sole currency, such as Andorra, Kosovo[a] and Montenegro, without even an agreement. These states are also not considered part of the official eurozone by the ECB. However, in some usage, the term eurozone is applied to all such states and territories that have adopted the euro as their sole currency.[29] Further unilateral adoption of the euro (euroisation), by both non-euro EU and non-EU members, is opposed by the ECB and EU.[30]

Administration and representation

Further information: European Central Bank and Euro Group
Jean-Claude Juncker is the incumbent Euro Group president

The monetary policy of all countries in the eurozone is managed by the European Central Bank (ECB) and the European System of Central Banks (ESCB) which comprises the ECB and the central banks of the EU states who have joined the zone. Countries outside the European Union, even those with monetary agreements such as Monaco, are not represented in these institutions. The ECB is entitled to authorise the design and printing of euro banknotes and the minting of euro coins.

The eurozone is represented politically by its finance ministers, known collectively as the Euro Group which is presided over by a president, currently Jean-Claude Juncker. The finance ministers of the EU member states that use the euro meet a day before a meeting of the Economic and Financial Affairs Council (Ecofin) of the Council of the European Union. Legally speaking, this group is not an official formation of the Council of the European Union. However, under the Treaty of Lisbon (due to come into force on 1 December 2009), the Euro Group would gain a legal basis and be given an official President (dubbed "Mr. Euro")[31][32] The Council's rules would also be amended so that when the full EcoFin council votes on matters only affecting the eurozone, only Euro Group member states are permitted to vote on it.[33]

On 15 April 2008 in Brussels, Juncker suggested that the eurozone should be represented at the International Monetary Fund as a bloc, rather than each member state separately: "It is absurd for those 15 countries not to agree to have a single representation at the IMF. It makes us look absolutely ridiculous. We are regarded as buffoons on the international scene."[34] However Finance Commissioner Joaquín Almunia stated that before there is common representation, a common political agenda should be agreed.[34]

Economy

Comparison of eurozone with other economies, 2006.[1]
Zone Population GDP % world Exports Imports
Eurozone 317 million €8.4 trillion 14.6% 21.7% GDP 20.9% GDP
EU (27) 494 million €11.9 trillion 21.0% 14.3% GDP 15.0% GDP
United States 300 million €11.2 trillion 19.7% 10.8% GDP 16.6% GDP
Japan 128 million €3.5 trillion 6.3% 16.8% GDP 15.3% GDP
GDP in PPP, exports/imports as goods and services excluding intra-EU trade.

Inflation

HICP figures from the ECB;[35]

  • Mid 1999: 1.0%
  • Mid 2000: 2.0%
  • Mid 2001: 2.8%
  • Mid 2002: 1.9%
  • Mid 2003: 1.9%
  • May 2004: 2.5%
  • May 2005: 2.0%
  • May 2006: 2.5%
  • May 2007: 1.9%
  • May 2008: 3.7%
  • May 2009: 0.0%

Interest rates

Interest rates for the eurozone, set by the ECB since 1999. Levels are in percentages per annum. Prior to June 2000, the main refinancing operations were fixed rate tenders. This was replaced by variable rate tenders, the figures indicated in the table after that refer to the minimum interest rate at which counterparties may place their bids.[36]

eurozone interest rates
Date Deposit facility Main refinancing operations Marginal lending facility
01 Jan 1999 2.00 3.00 4.50
04 Jan 1999[37] 2.75 3.00 3.25
22 Jan 1999 2.00 3.00 4.50
09 Apr 1999 1.50 2.50 3.50
05 Nov 1999 2.00 3.00 4.00
04 Feb 2000 2.25 3.25 4.25
17 Mar 2000 2.50 3.50 4.50
28 Apr 2000 2.75 3.75 4.75
09 Jun 2000 3.25 4.25 5.25
28 Jun 2000 3.25 4.25 5.25
01 Sep 2000 3.50 4.50 5.50
06 Oct 2000 3.75 4.75 5.75
11 May 2001 3.50 4.50 5.50
31 Aug 2001 3.25 4.25 5.25
18 Sep 2001 2.75 3.75 4.75
09 Nov 2001 2.25 3.25 4.25
06 Dec 2002 1.75 2.75 3.75
07 Mar 2003 1.50 2.50 3.50
06 Jun 2003 1.00 2.00 3.00
06 Dec 2005 1.25 2.25 3.25
08 Mar 2006 1.50 2.50 3.50
15 Jun 2006 1.75 2.75 3.75
09 Aug 2006 2.00 3.00 4.00
11 Oct 2006 2.25 3.25 4.25
13 Dec 2006 2.50 3.50 4.50
14 Mar 2007 2.75 3.75 4.75
13 Jun 2007 3.00 4.00 5.00
09 Jul 2008 3.25 4.25 5.25
08 Oct 2008 2.75 4.75
09 Oct 2008 3.25 4.25
15 Oct 2008 3.25 3.75 4.25
12 Nov 2008 2.75 3.25 3.75
10 Dec 2008 2.00 2.50 3.00
21 Jan 2009 1.00 2.00 3.00
11 Mar 2009 0.50 1.50 2.50
08 Apr 2009 0.25 1.25 2.25
13 May 2009 0.25 1.00 1.75

Fiscal policies

The primary means for fiscal coordination within the EU lies in the Broad Economic Policy Guidelines which are written for every member state, but with particular reference to the 16 current members of the eurozone. These guidelines are not binding, but are intended to represent policy coordination among the EU member states, so as to take into account the linked structures of their economies.

For their mutual assurance and stability of the currency, members of the eurozone have to respect the Stability and Growth Pact, which sets agreed limits on deficits and national debt, with associated sanctions for deviation. The Pact originally set a limit of 3% of GDP for the yearly deficit of all eurozone member states; with fines for any state which exceeded this amount. In 2005, Portugal, Germany, and France had all exceeded this amount, but the Council of Ministers had not voted to fine those states. Subsequently, reforms were adopted to provide more flexibility and ensure that the deficit criteria took into account the economic conditions of the member states, and additional factors.

The Organisation for Economic Cooperation and Development downgraded its economic forecasts on 20 March 2008 for the eurozone for the first half of 2008. Europe does not have room to ease fiscal or monetary policy, the 30-nation group warned. For the euro zone, the OECD now forecasts first-quarter GDP growth of just 0.5%, with no improvement in the second quarter, which is expected to show just a 0.4% gain.

2009 recession

As a result of the global financial crisis that began in 2007/2008, the eurozone entered its first official recession in the third quarter of 2008, official figures confirmed in January 2009.[38] On 11 October 2008 the Euro Group heads of state and government (rather than finance ministers) held an extraordinary summit in Paris to define a joint action plan for the eurozone and the European Central Bank to stabilise the European economy.

The leaders hammered out a plan to confront the financial crisis which will involve hundreds of billions of euros of new initiatives to head off a feared "meltdown".[citation needed] They agreed a bank rescue plan: governments would buy into banks to boost their finances and guarantee interbank lending. Coordination against the crisis is considered vital to prevent the actions of one country harming another and exacerbating the bank solvency and credit shortage problems. In the Great Depression, so-called "beggar-thy-neighbour" measures taken unilaterally by countries are considered to have deepened the economic loss.[39]

Despite initial fears by speculators in early 2009 that the stress of such a large recession could lead to the break up of the eurozone, the euro's position actually strengthened as the year progressed. Far from the poorer performing economies moving further away and becoming a default risk, bond yield spreads between Germany and the weakest economies decreased easing the strain on these economies. The ECB has been attributed much of the credit for the turn around in fortunes, injecting €500bn into the banks in June.[40]

See also

European Union portal

Notes and references

a.   ^ Kosovo is the subject of a territorial dispute between the Republic of Serbia and the self-proclaimed Republic of Kosovo. The Assembly of Kosovo unilaterally declared its independence on 17 February 2008, a move that is recognised by 64 of the 192 UN member states and the Republic of China (Taiwan), but not by other UN member states. Serbia claims it as part of its own sovereign territory.
  1. ^ a b The euro: An international currency, Europa (web portal)
  2. ^ "Countries, languages, currencies". Interinstitutional style guide. the EU Publications Office. http://publications.europa.eu/code/en/en-370300.htm. Retrieved 2 February 2009. 
  3. ^ The euro area, European Central Bank
  4. ^ Not including Sweden, which has a de facto opt out
  5. ^ "Agreements on monetary relations (Monaco, San Marino, the Vatican and Andorra)". http://europa.eu/scadplus/leg/en/lvb/l25040.htm. Retrieved 2 February 2009. 
  6. ^ A glossary issued by the ECB defines “euro area”, without mention of Monaco, San Marino, or the Vatican.
  7. ^ The agreements contain provisions that do not apply to the eurozone proper. For example, banks in Monaco need the consent of the ECB to gain access to national payment systems in France.[citation needed]
  8. ^ The self-declared Turkish Republic of Northern Cyprus is not recognised by the EU and uses the Turkish new lira. However the euro does circulate widely.
  9. ^ a b c French Pacific territories use the CFP franc.
  10. ^ Uses Swiss franc. However the euro is also accepted and circulate widely.
  11. ^ Aruba uses the Aruban florin. It is part of the Kingdom of the Netherlands, but not EU.
  12. ^ The Netherlands Antilles uses the Antillean guilder. It is part of the Kingdom of the Netherlands, but not the EU. The guilder typically followed the US dollar, but the Netherlands Antilles is to be dissolved with some islands becoming part of the EU. The future currency situation is unclear.
  13. ^ "Fifth Report on the Practical Preparations for the Future Enlargement of the Euro Area" (PDF). Commission of the European Communities. 2007-07-16. http://eur-lex.europa.eu/LexUriServ/site/en/com/2007/com2007_0434en01.pdf. Retrieved 6 January 2009. 
  14. ^ "Index - A gólya és a kettős kereszt már foglalt". Index.hu. http://index.hu/politika/kulfold/eu/euro7141/. Retrieved 2009-01-02. 
  15. ^ "Bulgaria’s eurozone accession drifts away". http://www.focus-fen.net/index.php?id=n160657. Retrieved 2008-11-25. 
  16. ^ "Poland may hold euro referendum in 2010-Deputy PM". Forbes. http://www.forbes.com/afxnewslimited/feeds/afx/2008/09/18/afx5440142.html. Retrieved 2008-09-19. 
  17. ^ "Poland may push back euro rollout to 2012". guardian.co.uk. http://www.guardian.co.uk/business/feedarticle/7799421. Retrieved 2008-09-19. 
  18. ^ "Poland may push back euro rollout to 2012". BizPoland. http://www.bizpoland.pl/news/index.php?contentid=172545. Retrieved 2008-09-19. 
  19. ^ "Polish charter must change before ERM-2". www.fxstreet.com. http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=c5dfd795-8560-498d-99ec-cc0066d38786. Retrieved 2008-09-25. 
  20. ^ "Poland will have to join ERM-2 at latest in Q2 2009". Forbes. http://www.forbes.com/afxnewslimited/feeds/afx/2008/09/25/afx5469429.html. Retrieved 2008-09-26. 
  21. ^ "Czech PM: On Nov 1 Govt Will Set Euro Adoption Date". http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=82909ae5-94b8-4124-8dcf-d9a1203ea4fb. Retrieved 2009-01-01. 
  22. ^ Dougherty, Carter (2008-12-01). "Buffeted by financial crisis, countries seek euro's shelter". International Herald Tribune (The New York Times). http://www.iht.com/articles/2008/12/01/business/euro.php?page=1. Retrieved 2008-12-02. 
  23. ^ "€5bn question is whether IMF will force Latvia to give up currency peg". Business News Europe. http://businessneweurope.eu/storyf1384. Retrieved 2008-12-03. 
  24. ^ "Newsvine - Denmark to Hold New Referendum on Euro". Newsvine.com. http://www.newsvine.com/_news/2007/11/22/1115165-denmark-to-hold-new-referendum-on-euro. Retrieved 2009-01-02. 
  25. ^ Denmark to hold new referendum on euroBy Robert Anderson in Stockholm Published: November 22 2007 15:10. "FT.com / World - Denmark to hold new referendum on euro". Ft.com. http://www.ft.com/cms/s/0/79799902-9909-11dc-bb45-0000779fd2ac.html. Retrieved 2009-01-02. 
  26. ^ "Denmark to hold second euro referendum - EurActiv.com | EU - European Information on Economy & Euro". Euractiv.com. 2007-11-23. http://www.euractiv.com/en/euro/denmark-hold-second-euro-referendum/article-168631. Retrieved 2009-01-02. 
  27. ^ "Agreements on monetary relations (Monaco, San Marino, the Vatican and Andorra)". European Communities. 2004-09-30. http://europa.eu/scadplus/leg/en/lvb/l25040.htm. Retrieved 2006-09-12. 
  28. ^ The euro outside the euro area, Europa (web portal)
  29. ^ [1][2][3]
  30. ^ ECB: "UNILATERAL EUROIZATION BY ICELAND COMES WITH REAL COSTS AND SERIOUS RISKS"
  31. ^ An economic government for the eurozone? PDF, Federal Union
  32. ^ PROTOCOLS, Official Journal of the European Union
  33. ^ Treaty of Lisbon (Provisions specific to member states whose currency is the euro), EurLex
  34. ^ a b Vucheva, Elitsa (2008-04-15)eurozone countries should speak with one voice, Juncker says, EU Observer.
  35. ^ European Central Bank (2007-12-14). "Euro area (changing composition) - HICP - Overall index, Annual rate of change, Eurostat, Neither seasonally or working day adjusted". http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=122.ICP.M.U2.N.000000.4.ANR. Retrieved 2008-01-02. 
  36. ^ Key ECB interest rates, ECB
  37. ^ The ECB announced on 22 December 1998 that, between 4 and 21 January 1999, there would be a narrow corridor of 50 base points interest rates for the marginal lending facility and the deposit facility in order to help the transition to the ECB's interest regime.
  38. ^ EU data confirms eurozone's first recession, EUbusiness.com, January 8, 2009
  39. ^ "European leaders agree crisis rescue at summit — EUbusiness.com - business, legal and economic news and information from the European Union". Eubusiness.com. http://www.eubusiness.com/news-eu/1223856121.86. Retrieved 2009-01-02. 
  40. ^ Oakley, David and Ralph Atkins (17 September 2009) Eurozone shows its strength in a crisis, Financial Times

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